Budget 2013: The ace up Chidambaram's sleeve

Chidambaram, India's most experienced finance minister since 1991, is now into his third stint in the ministry. It is plausible that Budget 2012/13 will surprise us with expenditure compression, thereby allowing the government to meet its revised fiscal deficit target.

On Tuesday, January 22, Citibank hosted Finance Minister P Chidambaram in Hong Kong for his global investor meet. The audience consisted of more than 200 investors, said a Citi Research report issued the same evening.

The salient aspect of the report's description of Chidambaram's engagement with the audience was the confidence he projected while speaking about India's fiscal deficit in 2012/13. (Fiscal deficit refers to the excess of government expenditure over revenue, which is bridged through borrowings.)

A few months ago analysts were pessimistic about the government's ability to meet its fiscal deficit target of 5.1 per cent of gross domestic product - Rs 5.13 trillion - in 2012/13. Their worst fears were confirmed when Vijay Kelkar, the chairman of the 13th Finance Commission, gave the government a report in September 2012 that said there could be a slippage of a percentage point if immediate steps were not taken to check the deficit.

Despite Chidambaram's attempts since mid-September to deal with the situation, analysts have remained sceptical. The revised target for the fiscal deficit was 5.3 per cent, a slippage of 20 basis points. Even the revised target failed to convince analysts - with the economy in slowdown mode, revenue was bound to fall short of initial targets.

It could be that most analysts have been looking at the wrong side of the financial statement. It is generally assumed that fiscal consolidation in India will be led by a surge in revenue. Perhaps analysts have got hold of the wrong end of the stick. It might be expenditure compression that is the source of Chidambaram's confidence.

For a single year, it is not difficult for a finance minister to squeeze expenditure. Two aspects of government systems help: the cash accounting system and inefficiencies in the system, which slow down spending.

Unlike companies, the government's accounting is on a cash basis. Simply put, an expense is not incurred unless the money flows out of the government's coffers. In contrast, if a private company buys a car in March (the last month of the financial year), but delays payment till May, the expense is still booked in March.

Cash accounting gives a finance minister the leeway to book expenditure only for items where payment was actually made. And this could be lower than what the initial budget estimates show.

The Comptroller and Auditor General's (CAG) report on the government finances of 2010/11 give instances of the inefficiencies in the government machinery that lead to overstated expenses in a financial year or a last-day rush to spend. Both these aspects provide a savvy finance minister room to squeeze expenditure.

According to the CAG, a lot of centrally sponsored schemes involve the union government transferring money outside government accounts to implementing agencies such as NGOs to execute schemes.

Typically, inefficiencies in this chain result in unspent balances and lead to overstated government expenditure. In 2010/11, Rs 1.22 trillion was directly transferred to state and district-level autonomous bodies for centrally sponsored schemes, potentially a large sum to look for options to compress expenditure.

Another flaw in the system pointed out by the CAG is bunching of spending in the last month of the financial year or even the last day of the financial year. Bunching of payments usually provides the finance ministry a chance to choke poorly thought out expenses. Even a day's delay on account of questions means expenses can't be booked in 2012/13 if some ministry wants money on March 31.

The CAG showed that in 2010/11, in an area such as spending on advertising and publicity, 42 per cent of the spending was in March, of which 17 per cent was on the very last day.

Chidambaram, India's most experienced finance minister since 1991, is now into his third stint in the ministry. It is plausible that Budget 2012/13 will surprise us with expenditure compression, thereby allowing the government to meet its revised fiscal deficit target.